No matter how well we manage our money there will come a point in our lives where we need to purchase something on credit. Improving your credit score could save you $1000s on financial products such as mortgages, loans and credit cards. The best way to start building your creditworthiness is by checking your credit reports.
A credit report contains everything lenders like to know about you before they decide whether to let you borrow. The important things to know are:
- A Consumer Reporting Agency (CRA) is an independent organization that securely holds data about you – including things like your credit applications, accounts and financial behavior.
- There are three main US Consumer Reporting Agencies or simply "credit bureaus" - Experian, Equifax and TransUnion - and each owns a separate credit report about you.
- It's free to check your credit reports online. Try it now using the following services:
- Credit Karma (TransUnion and Equifax)
- Credit Sesame (TransUnion)
- Mint (TransUnion)
- Not all creditors report to all three bureaus, so it's best to check all three.
- The amount of time the bureaus hold data about you varies but generally it is held for seven years, which is one of the reasons why you want to avoid things like late payments.
Who uses Credit Scores?
Typically, companies offering the following products and services will use a credit report to assess your creditworthiness:
- Bank Accounts
- Credit Cards
- Retail Finance
- Home Rental
- Cell phones - pay monthly contracts
- Car financing or leasing
- Insurance (e.g. Life, Home and Car)
- Small Business Loans
They are used more often than you realize!
How are Credit Scores used?
How your credit score is used will vary for each company. That's because they all use different methods of evaluating your credit history using their own analysis and models. These models are used to determine the likelihood that you’ll keep up with the credit repayments. The company will then apply cut-offs to determine if you can get the product or not, depending on the amount of risk they want to accept.
That’s why if you’re perceived as “riskier” you’re less likely to be approved, or if you are approved it may cost more. This illustrates the importance of looking after your credit history to ensure that you don’t get a nasty surprise.
This post was written and compiled by the credit experts behind Loqbox – a completely free way to grow your savings and build your credit score.